Sun TV Network's Q4FY19 results (Outperformer) - Tariff order implementation impact higher than expected…

Q4FY19 result highlights

• Rev. grew by 24% yoy to Rs8.89bn (7% miss on account of miss in ad/subs rev.) entirely driven by film production and IPL. EBIT (excl. OI) fell by 15.5% yoy to Rs3.4bn (miss of 19%) due to poor performance of core broadcast and film production division. PAT fell by 11% yoy to Rs2.57bn (16% miss).
• The implementation of the new tariff order (NTO) led to disruptions in the last-mile which impacted the overall reach of the broadcast industry impacting both Ad and subscription rev. for Sun TV. Ad rev was flat yoy (vs exp. of 7.5% growth) and subscription rev. grew by just 4% yoy vs exp. of growth of 14%. The moderation in growth in the FMCG sector (more than 60% contributor to Sun TV’s ad rev.) exacerbated the impact on the NTO.
• Broadcast segment (excl. IPL & Film production) results: Rev. was flat yoy due to flat ad rev. and anaemic growth in subs. rev. EBIT (excl. OI) fell by 20% yoy led by 76% yoy increase in content cost and 53% yoy increase in SG&A due to new shows, Sun Life & Sun Bangla launches over the year. PBT fell by 11% yoy, despite 20% fall in EBIT, as OI was higher than exp. (at Rs673m vs Rs450m est).
• Film segment reported rev. of Rs1.15bn with EBIT loss of Rs30m and IPL segment reported rev. of Rs580m with EBIT of Rs205m.
• SUNTV expects the impact of the NTO to linger over the next 1-2 quarters and as a result did not provide any guidance for ad rev. growth. It lowered the subs. rev. growth guidance to 14-15% for FY20E (from 20% earlier) with bulk of it being back-ended. Under the NTO, DTH monetisation/subscriber is falling to Rs~35 (from Rs42) but cable monetisation at Rs25/sub is much better than existing calc. realisation of Rs3-4/sub; this coupled with massive scope of analog to digital conversion makes the management confident that medium-term subs. rev. growth would be extremely strong.            

Key positives: Sustained IPL performance, higher OI.

Key negatives: Poor ad/Subs rev. performance, sharp EBIT miss.

Impact on financials: Cut FY20E EPS by 6%, introduce FY21E financials.

Valuations & view

The NTO implementation has stalled the gradual recovery which Sun TV was scripting and pushed it by a quarter or two. This would keep the near-term stock price performance under check; however, once subscription rev. growth picks up (expected by end Q2FY20E) and visibility improves on its ad growth, we expect the stock to come back on the radar of investors. Inexpensive valuations (at 13.8x FY21E EPS) and high return ratio would be another pull factor. Management’s willingness to invest in digital is welcome and we would appreciate an aggressive stance here (await more clarity on strategy). We maintain OP with a revised price target of Rs641 (16x FY21E EPS). Key trigger for the stock would be improvement of market-share in TN and subs. rev. trajectory.